Buying and Selling of Property, Plots, Flats, Land, Independent Houses, Floors or any other form of residential property is a frequent activity in present scenario. Especially with so much activity in the real estate sector, it has been considered to have given good returns. The attractive home loan schemes have made it even more lucrative. However, the transactions are often subject to complicated income tax structure. Here is one case that may solve some of your queries.
When you are about to sell a piece of land for a profit, it is quite likely that Capital Gains Tax would be imposed in the form of Long Term Capital Gain (LTCG). This remains a concern for a lot of people that how can they possibly avoid Capital Gains Tax arising out of the Long Term Capital Gain. In the present article we are discussing an example case.
In the present case the example assessee, an individual, is in the process of transferring a long term capital asset not amounting to a residential house and the proceeds are to be utilised to buy a capital asset amounting to residential house.
The treatment of capital gain on the transfer of capital asset not amounting to residential property is under consideration. Section 54F of the Income tax Act 1961 deals with the current situation.
Where the assessee is an individual, and capital gain arises from the transfer of any long term capital asset (not being a residential house) which in the present case is a piece of land (not amounting to agricultural land) and the assessee has within a period of one year before or after the date on which the transfer of the original asset has taken place, has purchased a residential house (new asset) or has constructed a residential house within three years; the capital gain shall be dealt as per the following conditions:
- If the cost of the new asset is more than the net consideration received in respect of the original asset, the whole of such capital gain shall not be charged to capital gain tax as per section 45 of the Income Tax Act.
- If the cost of the new asset is less than the net consideration in respect of the original asset, so much of the capital gain as bears the cost of the new capital asset shall not be charged to capital gain tax as per section 45 of the Income Tax Act.
However, the capital gains exemption enumerated in (a) & (b) above is subject to the some conditions. The benefits as discussed shall not be available if:
- If the assessee owns more than one residential house, other than the new asset, on the date of transfer of the original asset.
- If the assessee purchases any residential house, other than the new asset, within a period of one year after the date of transfer of the original asset
- If the assessee constructs any residential house, other than the new asset, within a period of three years after the date of transfer of the original asset.
If you have further queries on the subject of tax related queries, the experts in the panel would be happy to help you with sound tax advice.
I think common man will stop investing in Property/Equity market for long term (even short term), People will keep their money either in the form of Gold or cash in banks. If they invest in property, they will accept cash in transaction, more black money. Its impact will be on almost all businesses related to Property/Equity Market. India is accepting western style of economy. And Western world is trying to adopt Indian style of economy. In last recession it has been proved that our legacy style of economy is very stable/robust/sustainable. I don’t know why our economist are trying to create a bubble, which will burst after 6-7 years. Be ready for another recession after Direct Tax Code.
Please let me know whether the onus of payment of Long term capital Gains Tax rests with the owner of the asset (seller) or the buyer?If the buyer is abroad and not aware of the laws of the land of the seller is it not the duty of the seller to pay the Taxes?If the seller is also foreigner, only after he remits the tax dues he will be allowed to transfer ownership and fly away.So all the controls are here why catch the innocent buyer?
@Dhanu
Its the seller which is earning profits by selling his property, so seller is responsible for payment of income tax on capital gains incurred.
Hello Dhanu,
Let me reply your question in broader way and then you get it checked minutely.If both buyer and seller are living overseas then even RBI permission is required to sell the property.Having said that if the buyer is local then onus of paying tax goes with the buyer as he becomes his agent.Third when both are outside apart from RBI permission, how income tax looks into that you will have to check that.May be RBI will need Income tax clearance before granting permission.Even once I broke my head in checking with RBI when prospective buyer of my property was non resident but now in my case buyer is not NRI.So he is responsible.But he is safe as I am meticulous in paying taxes.But let me add the buyer in my case is a CA.And on back of his mind he is aware of laws but he is not bothering himself because he could find me so over-cautious that he is taking calculated risk and may be by final payment he may ask me about payment of taxes.Let me tell you it can go unnoticed but once file opens then it is difficult to close.So why to create any loophole when most of us are overseas to have carefree life.Ching Ching.Have a great day.
@Rekha
Thanks for your input.
I am not a finance/income tax professional and its good that professional people are visiting and answering complex queries to help people out.
Hello Pankaj,
You are too humble.But you have taken the major initiative to open this Blog.We are all grateful.
@Rekha
Thanks.
Yes, despite being a Techie and a non-finance professional, I am trying to share whatever I know and have experienced.
I may not be correct or complete in all of my replies, but I can always learn from people visiting the blog.
Thank you Rekhaji for the inputs and also Pankaj ji for opening a facilty to share the thougts.I became curious after the demand on Vodofone the buyer by Indian Income Tax to pay thousands of Crores Rs as TDS on CGT(Capital Gains Tax)supposedly gained by the seller Hutchinson.Now it becomes clear that one more Govt agency (RBI) is involved which gives all clear signal and another Govt Agency says that the Green is wrong.Why not Agency A discuss with B before the green signal.
Following is a brief summary for your better understanding.
Property type – Flat in a Building located at Mumbai
Originally the flat was on my grandfather’s name on monthly tenancy basis since 1976.
The Owner of property as well as building was ABC.
Rent receipts are available from 1990 onwards.
During 1992, it was transferred in the name of my grand mother.
During 1995, it was transferred in the joint name of my grandmother and father.
During March’1998, it was transferred in single name of my father.
During April’1998, it was transferred in my name exclusively.
During May’2001, the entire property was sold by ABC to the new owner XYZ.
Hence I became a tenant of new owner XYZ and the rent receipts are preserved with me from 2001 till May2005.
During October’2005, the project for redevelopment of old building by demolishing the old one was started. Accordingly during October 2005, I entered into an agreement to sale with XYZ for surrendering the tenency rights in old premises and became owner of the new block in the new building for a consideration of Rs. 4.50Lacs. The last rent paid by me was about Rs. 110/- per month.
The actual market price in 2005 for my flat could have been somewhere about 12 Lacs, however builder charged me only Rs. 4.5 Lacs for surrendering Tenancy rights.
There was a delay in building and finally the construction was completed and possession letter was issued to me during March’2008. The last payment to builder was made in 2008.
And now, in Oct’2009, I have sold the flat for about 12Lacs.
Specific Query –
1. How to calculate Cost of initial acquisition in this particular case, considering heriditary property & surrendering of tenancy rights?
2. Is it a long term or short term CG?
@Kay
Yours is a complex case and I don’t have much knowledge regarding same. Please consult any tax professional or CA.
@Pankaj, Thanks. While i agree that this is a complex case, but this is typically a case of most of old residents of Mumbai. You wud find hundreds of similar cases like this.
Taking your advise, i wud consult CA however knowing your expertise, I wud appreciate if you could give some logical reasoning or your judgement on this case.
Thanks in advance. Kay
@Kay
I don’t have any formal education of taxation and finance and It would be unfare for me to provide my judgment.
@Pankaj,
I sold a property(land) and might roll the proceedings into a house within a year after the sale of land. House will cost more than the proceedings from sale of the land. In this case is LTCG due @ sale of land? Is there a way to avoid LTCG and roll the proceedings into the house? What if the house is purchased in 2 – 3 years (ie not within the first year after sale of land)? Any comments??
@Investor
As you are investing the amount back into a house property, this should not attract any long term capital gains.
It can be invested into house property within 2 years of sale, but for mean time, gains has to be invested into a capital gains account.
Before, I will present to you my case:
I am selling my property today at Rs. 900000/- which was purchased in year 1991-92 for 99000/- (Indexation Cost = Rs. 353,714/-) plus Stamp Duty & Registration Extra. I am buying new property for 2250000 (Agreement value) + Stamp Duty & Registration Charges of Rs. 115000/-, out of which, Rs.2000000/- would be paid from Bank loan and Rs. 360000/- as self contribution.
Now my queries is as follows:
1) Can I claim deduction for brokerage to agent (paid in cash), advertisement in newspapers (paid of cash), transfer fee (in cheque) of Rs. 1000/- paid to the society for my old flat in 1991-92?
2) If i am eligible for the claim no. 1, do I get indexation benefits for the same?
3) Can I claim brokerage to agent for sale of Old Flat and purchase of New Flat as Cost of Purchase of New Flat? Do I have to pay in Cheque only or i can also pay in Cash and take receipt for the same ?
4) I am also going to pay transfer charges for my old Flat too (transfer from my name to new owner name). Can i claim that too ?
What would it be treated as – Cost of Purchase for Old Flat or Cost of Purchase for New Flat ?
@Mihir
Stamp duty and registration charges can be included in cost for capital gain calculations.
But brokerage, marketing cost, transfer fees can not be adjusted.
Dear Pankaj,
Can one invest the LTCG into buying a property joinly owned with one’s daughter, where-in that sum would cover only part of the cost of the new property and the daughter would have to take a home loan for the remaing?
Thanks.
@Vikram
Yes, you can invest as as co-owner for saving capital gains tax. But it should be match minimum to your ownership cost in property.
Dear Rajesh,
I purchased a residential plot in Bangalore in 1986 for Rs.1.5 lakhs. Today value of the plot is Rs.1.5 cr. I want to sell the said plot and with the money construct a house on another plot, 1/3 of this second plot is owned by me and 2/3 by my wife. The cost of construction of the house will be less than the sale consideration I will be getting for the 1st plot. Can I utilise the balance amount of the sale proceeds to purchase an apartment or land. Will I have pay capital gains tax?
@Francis
To avoid capital gains, only one purchase is allowed. If the whole capital gain is not invested into another property, tax has to be paid on balance amount.
how to calculate IT? if bank intrest:1036 , long term capital gain:448841 short term capital gain :894 , income from rent 225000, and income from other source 347478, Advance tax paid 25000,lic 101508, medicliam 6990 and tds recd.25000
Hello Pankaj, I read in Prema Shah case NRI was allowed to buy overseas property under Section 54.But if I need to take money overseas on sale of residential house in India,I need to produce a CA certificate to bank that tax has been paid on money intended to be remitted overseas My question is what will be the steps in case I want to buy overseas property under Section 54.Don’t say that I need to ask a professional.I have asked so many professionals.First they are ignorant about it, then get surprised on Prema Shah judgement.Then they start arguing as to how judge dared to have a different wave length then what they have and then they are deaf mute.I even had to say to them how unprofessional and unsatisfying this would be to them as a professional when client brings a copy of judgement and still they are not able to help him or her.They are not able to understand simple fact that Section 54 is silent about where property is bought and also the fact if resident Indian has ventured to have a living abroad ,he should not be penalized in not having a place to live in.I think you mentioned somewhere in site that case can be put to panel of experts.Hope you are able to show me how to proceed.
@Rekha
I am sorry to say that, I am not a income tax professional or a CA. Actually I am an software professional and answer queries to share what I know.
I would request you to consult any experienced tax professional regarding your case.
Dear Pankaj,
I am selling my house now and I have booked another house, the payment for which will be made in the next one year (the new house costs more than what I received by selling old one). Do I have to pay capital gain tax? If not, do I need to keep the amount received in a totally separate bank account and pay from that? Or is it OK if keep the money in an existing bank account and pay from that? Please let me know ASAP.
Regards,
Aryan
@PMAryan
As long as your capital gains from older house is less than the price of new house, you need not to pay income tax on that.
You can continue keeping the amount in your existing back account and pay from there, there won’t be any issue.
Pankaj can you recheck again.My understanding is dear Aryan can keep the money in his bank account for 6 months then he may have to shift to Capital Gain account by opening the same in SBI.
@PMAryan, Rekha
In case you are not decided about buying new property but intend to buy one later and still want a deduction on the tax on your capital gain, you must invest whole amount in Capital Gains Scheme of Deposit Account, which can be opened in any public sector bank branch. But if this amount is not used for buying new house within three years, tax on long term capital gain have to be paid.
Hello Pankaj & Rekha,
I understand that since I am starting investing in the new house immediately (in fact I have already paid the booking amount), I need not open another account.
Thanks for your suggestions and advice.
Pankaj,Aryan question is can he keep the balance money in his bank account when he is already made part payment for buying property.My information is yes but for the first 6 months after capital gain has arisen.Then it is to go to cgscheme account when balance payment are to be given after a year.
i prur.ahouse 1993 rs.20lac now sell value 125lac then what s i.tax and how can save n investing place.pl advice, what my bhabi can be gift her share to me?
@Neeraj
Since you have kept the house for more than three year, its long term capital gain.
In case of long term gain, you can invest the amount again in buying another house (within a year of selling or within 2 years of transfer) or construct another house within 3 years of sale or Invest in capital gains bonds within 6 months of sale (Section 54 EC of the Income Tax Act) issued by Rural Electrification Corporation, National Highways Authority of India and National Bank of Agricultural and Rural Development.
In case you are not decided about buying new property but intend to buy one later and still want a deduction on the tax on your capital gain, you must invest whole amount in Capital Gains Scheme of Deposit Account, which can be opened in any public sector bank branch. But if this amount is not used for buying new house within three years, tax on long term capital gain have to be paid.
Income tax on long term capital gains is 20% with indexation.
Lets say purchase price = X, purchase year = P, sale price = Y, sale year = Q
Cost Inflation Index (CII) for year P = R, Cost Inflation Index (CII) for year Q = S
Indexed purchase price, Z = X * (S/R)
Capital Gain, C1 = Y-Z
Tax with indexation = C1*20%
CII for 1993-94 was 244 and for 2010-11 is 711.
Your Bhabhi cannot gift her share to you, it will be still taxable.
I bought residential flat in 2006 for 39L (incl stamp duty & regn) in Navi Mumbai. Now (in Nov 2010) I am wanting to sell the said flat in 80L and buy a commercial office space (also in Navi Mumbai) by putting this and some more money. What will be my capital gain tax implications on this transaction or how can I save this tax
@Pradeep
Since you have kept the house for more than three year, its long term capital gain.
To save income tax on this capital gain, you can invest the gain amount in buying another house (within a year of selling or within 2 years of transfer) or construct another house within 3 years of sale or Invest in capital gains bonds within 6 months of sale (Section 54 EC of the Income Tax Act) issued by Rural Electrification Corporation, National Highways Authority of India and National Bank of Agricultural and Rural Development.
In case you are not decided about buying new property but intend to buy one later and still want a deduction on the tax on your capital gain, you must invest whole amount in Capital Gains Scheme of Deposit Account, which can be opened in any public sector bank branch. But if this amount is not used for buying new house within three years, tax on long term capital gain have to be paid.
Income tax on long term capital gains is 20% with indexation.
Lets say purchase price = X, purchase year = P, sale price = Y, sale year = Q
Cost Inflation Index (CII) for year P = R, Cost Inflation Index (CII) for year Q = S
Indexed purchase price, Z = X * (S/R)
Capital Gain, C1 = Y-Z
Tax with indexation = C1*20%
As you are interested in buying commercial property after selling residential, You won’t be able to save income tax on capital gains.
Thanks Pankaj.. What happens if ones selling price and buying price is kept the same even after 3 yrs. Even in such case LTCG tax is levied..if so how much..
thanks again
@Pradeep
If there is no gain, there will be no income tax. As per last reply, you have compute capital gain and income tax.
@Pankaj
If there is no gain there is no income tax. Will Capital gain tax will be levied due to indexation etc reasons even though property is sold at same price as buying over 3 yrs back
@Pradeep
Cost Inflation Index for a year is mostly more than what was there for preceding years (Only case it will be less when there is negative inflation, which never happens practically).
So capital gains can not be positive if you sell at same price at a later date.
Hi Pankaj,
Thanks for the info you provided
One question though it is a repeat, can I consider my stamp duty and registration cost as part of my flat cost which I sold? If so where can I get a confirmation details (some tax site)
Can I also show the stamp duty and registration fee I am paying for the new flat purchaing as cost and deduct from the capital gain?
Thanks
@Gurunath
Yes, you can consider stamp duty and registration cost as a part of acquisition cost for both flats being sold and bought.
Here is the relevant link : http://www.incometaxbangalore.org/faq/cgains.htm (See Question 3)
Thanks Pankaj for your quick responce.
Appreciate your timely help
Hi Pankaj,
I have one more question. I understood that you can claim tax benefit if you own only one house excluding the new asset.
I have two flats one on my name one on Joint with my wife. I sold the flat which jointly owned with my wife and now purchasing a new flat again jointly. Can I get the capital gain tax benefit in this transaction?
If not, what are the other ways to reduce tax liability. Can I show this transaction under my wife’s return and claim the tax benefit? Since it is a joint property.
Or can we share the profit and avail the tax benefit by my wife and pay tax in my share?
Please advice with your knowledge
Thanks in advance.
@Gurunath
Yes you both can get capital gain tax benefit.
Capital gain arising due to this transaction will be divided among the joint owners in same ratio as ownership.
If both of you again invest in another residential property for more or equal to the individual capital gains, it will be tax free.
Thanks Pankaj,
But not clear about the section 54F applicability if I own two flats (other than the new one acquiring).
I have two flats one on my name one on Joint with my wife. I sold the flat which jointly owned with my wife and now purchasing a new flat again jointly. Can I get the capital gain tax benefit in this transaction?
My tax excemption is based on 54 or 54F. Confused on 54F section which says
54F. Capital gain on transfer of certain capital assets not to be charged in case of investment in residential house.
(1) Subject to the provisions of sub-section (4), where, in the case of an assessee being an individual or a Hindu undivided family, the capital gain arises from the transfer of any long-term capital asset, not being a residential house (hereafter in this section referred to as the original asset), and the assessee has, within a period of one year before or two years after the date on which the transfer took place purchased, or has within a period of three years after that date constructed, a residential house (hereafter in this section referred to as the new asset), the capital gain shall be dealt with in accordance with the following provisions of this section, that is to say,-
(a) if the cost of the new asset is not less than the net consideration in respect of the original asset, the whole of such capital gain shall not be charged under section 45;
(b) if the cost of the new asset is less than the net consideration in respect of the original asset, so much of the capital gain as bears to the whole of the capital gain the same proportion as the cost of the new asset bears to the net consideration, shall not be charged under section 45:
Provided that nothing contained in this sub-section shall apply where-
(a) the assessee-
(i) owns more than one residential house, other than the new asset, on the date of transfer of the original asset; or
(ii) purchases any residential house, other than the new asset, within a period of one year after the date of transfer of the original asset; or
(iii) constructs any residential house, other than the new asset, within a period of three years after the date of transfer of the original asset; and
(b) the income from such residential house, other than the one residential house owned on the date of transfer of the original asset, is chargeable under the head “Income from house property”.
Thanks in advance.
@Gurunath
Section 54 applies to your case since you are selling a residential property and again buying another from capital gain of property sale.
Section 54F applies to cases where capital gain does not arise from previous residential property sale but from other assets like shares, a plot of land, commercial assets, commercial house property, jewellery etc.
Section 54 does not have any rider condition but 54F has conditions attached.
Hi pankaj,
I purchased a shop in 2004 for 9 lac. in a joint name i sold in 2010 in 40 lac. now i wanted to buy new resi. flat of Rs. 35 lac. in joint name and payment of outstanding loan of my old resi. flat in a joint name of Rs. 5 lac. So that, can I save LONG TERM CAPITAL GAIN
@Anil Kumar
Your case falls under section 54F, as you sold a commercial space and buying a residential one.
To save income tax on this capital gain, you can invest the gain amount in buying a residential house (within a year of selling or within 2 years of transfer) or construct another house within 3 years of sale or Invest in capital gains bonds within 6 months of sale (Section 54 EC of the Income Tax Act) issued by Rural Electrification Corporation, National Highways Authority of India and National Bank of Agricultural and Rural Development.
In case you are not decided about buying new property but intend to buy one later and still want a deduction on the tax on your capital gain, you must invest whole amount in Capital Gains Scheme of Deposit Account, which can be opened in any public sector bank branch. But if this amount is not used for buying new house within three years, tax on long term capital gain have to be paid.
But there are below conditions to it, If any of the case valid then this section cannot be applied for tax saving:
(i) Assessee owns more than one residential house, other than the new asset, on the date of transfer of the original asset; or
(ii) purchases any residential house, other than the new asset, within a period of one year after the date of transfer of the original asset; or
(iii) constructs any residential house, other than the new asset, within a period of three years after the date of transfer of the original asset; and
The income from such residential house, other than the one residential house owned on the date of transfer of the original asset, is chargeable under the head “Income from house property”.
Pankaj.I was about to finish one deal then thought let me reconfirm.When I buy another house within the stipulated time for 3 years is it a condition that I need to utilize the sales proceeds of property sold or can I buy the new house even by taking a loan/mortgage and utlising the sale proceeds.In other words am I right so long as new residential house is purchased or constructed how it is financed is immaterial.
@Rekha
I am not able to find any relevant section in income tax act which does not allow that.
But to be on safer side, I would request you to consult a CA, before doing it.
I meant by taking a loan and not utlising the sale proceeds
hi pankaj,
I sold my comm. property for 45 lacs and this 45 lacs shall be used for buying a ready to move flat.. Now in my name only this flat. Further can I purchase one more another flat through finance, installment can be met out from the rent of previous flat. I am residing with my husbands flat
@Anil Kumar
If you purchase another residential house within one year or construct another house within 3 years, then the capital gain will become taxable.
Hi Pankaj,
I want to sell my apartment which is still under construction. I purchased this apartment 1 year back. If I buy another apartment which is much more texpensive han the apartment which I am selling, will I still be required to pay tax on the capital gain incurred?
@Animesh
As you have not kept the property even for 3 years, it comes under short term capital gains and it will be fully taxable and will be added to your income.
I inherited a house in delhi form my mother…she purchased the house in 1972 for Rs. 58,000…i inherited in 1984…In 1990 i construct one more floor with Rs. 1,75,000..i sold the terrace right above that floor in 1990…now i had two floor in the House…i sell one of them in Jul 2010 for 80,000,00…and purchase on plot in noida for Rs. 70,000,00 AND CONSTURCT THE HOUSE WITH Rs.5,00,000…Now i have one floor in old house and one house in noida..How i will calculate my capital gain for this FY and will i am eligible for capital gain..as i own one and purchased a new one
@Omesh
In case of inherited property, acquistion cost is same as the cost to the previous owner (your father), which is 58,000.
A. Cost inflation index of 1981 =100
B. Cost inflation index of 1990 =182
C. Cost inflation index of 2010 =711
D. Acquistion Cost in 1972=58000
E. Fair market value in 1981 (Lets say)=100000
F. Cost of the improvement in 1990 =175000
G. Indexed cost of the acquistion in 2010 = (C/A)x E = 711000
H. Indexed cost of the improvement in 2010 = (C/B)x F = 683654
I. Total indexed Cost in 2010=(G+H) = 1394654
J. Acquisition/Improvement Cost of one floor in 2010 = (I/2) = 697327
K. Selling cost = 8000000
L. Capital Gain = (K-L) = 7302673
So, as you are buying a new house which costs more than capital gains, there won’t be any income tax.
Even if you already own another house, there won’t be any income tax from capital gains under section 54.
Also, please consult a tax professional/CA in this case before taking a decision. This is as per my knowledge and there might be some difference in actuals.